Last updated -
When you are up to your eyeballs in debt, it can be frustrating and you might think debt consolidation is the answer. Trust, me. I’ve been there myself. However, before you start researching these companies or making phone calls, I beg you not to.
If you are deep in debt, the idea of just ONE payment at a single interest is always tempting. However, is it the best thing you can do for yourself to get out of debt? Not always. The reason is that debt consolidation is just a symptom of a an underlying issue — spending! If you don’t work to pay down the debt the right way and just lump it into one payment, more than 75% of the time, debt will return. You have to cure the illness (in this case spending) so that the debt can truly go away.
Of course, who wouldn’t love to pay a little less out of your pocket each month with the promise of a lower interest rate? It sounds ideal!!! However, what most of these companies do not tell you is that it will take you LONGER to pay down your debt, thus resulting in your paying more over the life of the debt than you would have, had you just done it yourself.
Here is an example which might help explain it better (this was taken from Dave Ramsey, as he did the calculations and explained it perfectly):
“If you happen to have two loans — one two-year loan for $10,000 at 12% interest and another four-year $20,000 loan at 10% interest. Your monthly payment on loan #1 is $517 and on loan #2 would run $583. That is $1,100 monthly.
What a debt consolidation company will do is tell you that they can lower your monthly payment to $640 per month and your interest rate will be 9%. At first glance, that looks FANTASTIC as you are saving $460 monthly.
However, what they do not tell you is that you will pay on that loan for a period of six year. if you had paid it off yourself, you’d pay both off in 4 yrs (perhaps less if you used a snowball method).
The total amount you will pay back over the life of the loan through the consolidation company is $46,080. However, had you just continued to pay the loans off yourself, your would have paid only $40,392. That is an additional $5,688 out of YOUR pocket — which goes directly into the pocket of the debt consolidation company!!”
Unfortunately, I have first had experience with a debt consolidation company. When I was in my early 20’s it seemed that this was the perfect solution to my debt nightmare. I could make just ONE payment every month and I’d get it all paid down. I didn’t learn. I still racked up debt. I was paying out only a small amount less through this company, but yet, was going to have to pay on the loan for a longer term. I ended up having to declare bankruptcy. Not my finest moment, but one that taught me a valuable lesson:
Anything worth having in life requires
hard work and dedication!
Once I went down that bankruptcy path, I did incur additional debt. However, this time around, I did it the RIGHT way. I worked hard (along side my husband) and we paid it all down — on our own. No help from anyone. We didn’t do a home equity loan. We didn’t consolidate. We just pushed ourselves and eventually, the debt was paid off.
I take complete ownership of my financial mishaps in life. Looking back now, I am actually grateful for them. I am the person I am today because of the failures I have made in my life. I learned a lot — and did so the hard way. However, I can now draw upon those experiences when teaching my children about finances, in hopes they will not repeat my mistakes.
Of course, if you are in need, there are companies who can help. You can contact the National Foundation for Credit Counseling to find someone in your area to help you. You might also reach out to your local Community America Credit Union as they will help you too — free of charge!
Just don’t think debt consolidation is the easy way out. It isn’t. There is no easy way out of debt. Just hard work, blood, sweat and tears. Lots of tears.
Oh — and before you go, make sure you check out some of our other great stories to help you with your own debt nightmares:
Alternatives to Visiting a Debt Consolidation Company
Alternatives to Filing for Bankruptcy
How to Get Out of Debt (even if you don’t make that much)
